26 April 2016

Make in India in Defence Production: Challenges & Opportunities

Collaboration and cooperation between the private sector and Public Sector Defence Units may create synergy in defence production. R&D needs to be taken to private firms and SMEs need to be encouraged to undertake the development and production of critical sub-assemblies through various policy supports. A boost in defence production in India will improve its defence preparedness, boost economy and provide employment apart from changing the technological landscape of India as it will also boost civil industries.

About 70 per cent of the capital acquisitions for equipping armed forces are met through imports. Therefore, one of the focussed areas for “Make in India” is defence industry that provides support to the national security in addition to creating employment.

Security is one of the most important matters of the state as security issues are closely linked with the legitimacy of the government. Though security encompasses many dimensions such as political including territorial security, economic security, cultural security and environmental security, defending the territorial integrity of the state is the prime responsibility of the government as most of the armed conflicts and wars have taken place for expansion and control over territories in order to enhance the tangible and intangible resources of state.

Accordingly, concerns for security of state necessitate defence preparedness by maintaining strong, adequate and effective armed forces at least to deter and counter perceived external threats. Defence preparedness requires acquisition of “means” for the fighting forces to match the capability of perceived adversaries in addition to will power, well trained armed forces, well planned strategies, information gathering, and soft power. The means include weapons, equipment and other supplies required for fighting forces during operation in war. Modern warfare is highly technology intensive so a major challenge before armed forces of any nation is the acquisition of weapons and equipment with adequately high technology matching to or better than that of the perceived adversaries.

Make in India in Defence Sector

The current NDA government led by Prime Minister Narendra Modi since May 2014, has accorded the highest priority to “Make in India” for boosting the economy and creating employment to its young population. Moreover, India is heavily dependent on imports to meet the defence acquisition requirements. About 70 per cent of the capital acquisitions for equipping armed forces are met through imports. Therefore, one of the focussed areas for “Make in India” is defence industry that provides support to the national security in addition to creating employment. Thus “Make in India” programme in defence sector is extremely relevant with the twin objectives of creating employment and bolstering defence preparedness in order to strengthen national security.

Despite their strength and hidden potential, state-owned defence manufacturing units and DPSU cannot do much towards the development of defence technologies…

The Government of India has provided adequate budgetary allocations in the past for acquisition of weapons, equipment and other supplies for armed forces but many a time, the same could not be fully utilised due to non-availability of adequate indigenous sources of supplies. Indigenous sources of supply of these weapons, equipment and supplies have been heavily dependent on the Defence Research and Development Organisation (DRDO) for design and development, and state owned production units and Defence Public Sector Undertakings (DPSU) for production. On account of poor performance of these entities due to a host of structural, operational and cultural problems, on account of exogenous as well as endogenous factors, the desired level of defence acquisition have not been met.

The private sector has not yet been able to make an appreciable presence in defence supplies especially in critical defence technologies. The Department of Defence Production (DDP) has a long acquisition process consisting of multiple steps starting with framing of Services Quality Requirements (SQR) at the Planning Directorate of each service, at the lowest level to the Defence Acquisition Council (DAC) at the highest level, and entire process of acquisition is very time consuming. In some cases, by the time delivery of weapons or equipment takes place, new sets of upgrades become a necessity.

Acquisition of critical weapons and equipment through imports sinks into a quagmire of corruption in many cases leading to delay or cancellation of the entire acquisition process. Moreover, due to global political constraints, wherever defence acquisitions through imports were made, in most of the cases, it was not contemporary world-class technology available. So, high priority on defence production in Make in India can boost development of indigenous defence industries in high end technologies that is essential for ensuring defence preparedness.

Concerns for security of state necessitate defence preparedness by maintaining strong, adequate and effective armed forces…

Defence production is also one of the priority areas for Make in India with a perspective to create additional employment as well as to make India self-reliant in defence production where about 70 per cent of capital acquisitions in weapon and equipment is through import. Despite high dependency on import for capital acquisitions in weapon and equipment, state-owned defence production units and DPSU are growing annually barely at an average rate varying from two to five per cent in terms of Value Of Production (VOP) on account of a number of endogenous and exogenous factors.

Indigenous Effort

High dependence on import and low growth rate of DPSU and state-owned defence production units make sense of nurturing defence industries in the private sector and bring Foreign Direct Investment (FDI) in defence industries for self-reliance in defence system. Self-reliance in defence production will prepare the nation better to meet the security challenges and to deter the perceived adversaries. Total global defence export business is estimated to the tune of $1.5 trillion. Therefore, it makes good sense to give a boost to defence production by the ‘Make in India’ programme as there are ample opportunities to meet national requirements and vie for a share in global export potential after meeting the national requirements.

It makes one to pause and think about how countries such as China and South Korea that were either on par or inferior to India in industrial and technological development till the 1970s, became exporter of defence items and India remained one of the biggest importers of the defence items in Asia. Definitely, the answer lies in technology acquisitions through Foreign Direct Investment (FDI) in civil as well as in defence technology coupled with Research and Development (R&D) pursued by these countries. Therefore, India also needs to boost its defence production taking lessons from China and South Korea; and should attract FDI in defence production as well as in civil sector as many civil sector technologies find usage in defence sector also.

Lack of clarity and transparency in identifying the main attributes of weapons and frequently changing of specifications retard the process of development of new weapons…

Despite their strength and hidden potential, state-owned defence manufacturing units and DPSU could not do much towards the development of defence technologies as it was not their mandate. Whatever little they do in R&D, is limited to incremental improvement in process improvement and component design that too after a rigorous process of consultations and approvals. The DRDO, which is responsible for the development of defence technologies, is constrained by its inefficiency in developing new products and systems. Most of the DRDO projects ranging from gas turbine engine Kaveri, Light Combat Aircraft Tejas to long-range Surface-to-Air Missile systems, are running years behind schedule with huge cost overruns. Even international peer group and experts also see lacklustre in India’s development of military technology.

Given below is the view of an international expert published in SIPRI especially about India’s missile development programme.

“Military research and development (R&D) in India is not progressing as rapidly or as far as its leaders had hoped and observers had predicted. The obstacles preventing India from developing a more advanced military technology base are primarily technical and economic, stemming from chronic problems with project management rather than any lack of scientific resources. Indian military R&D programmes have achieved some immediate goals but have not created the anticipated technological momentum that would allow them to move from limited import substitution to indigenous innovation.”

Emerging Geo-Political Scenario

Moreover, lack of clarity and transparency in identifying the main attributes of weapons and equipment required for the armed forces, delays in framing its specifications and frequently changing of specifications by procuring agencies, also retarded the process of development of new weapons and equipment. Whatever little these state-owned defence production units and DPSU could produce, is mainly due to technologies provided by the erstwhile USSR during the Cold War.

Foreign investors must be given a purchase order for adequate quantities at least equal to economic order quantity over a reasonably long period…

During the Cold War period, due to its proximity to the Soviet Union, and its nuclear and space programmes, India was considered pariah in the Western world as far as Transfer of Technology in defence was concerned. However, prospects of obtaining military technology from advanced countries are becoming greater with the changing global and regional security scenario.

With the changing geo-political scenario in the Asia-Pacific and the importance attached to this region by emerging global powers, India is being considered as a key player in maintaining regional stability. In the recent past, there have been paradigm shifts in the outlook of security architecture of the Asia-Pacific by key stakeholders of this region, and now the term ‘Asia-Pacific’ is being replaced by ‘Indo-Pacific’ in many security discourses. This has provided a new opportunity for India to have access to some of the key defence technologies from some of the key stakeholders in this region who are advanced in military technology.

An outcome of the same is reflected in the commitment of the US government in the recently concluded ten-year defence framework agreement signed on 03 June, 2015, between Indian Defence Minister Manohar Parrikar and his US counterpart Defence Secretary, Ashton Carter where commitment has been made in providing high-end military technology of jet engines and designs of aircraft carriers and much more. India needs to exploit such opportunities by making its defence acquisition policies more conducive to receive technology and investment in the defence sector.

The DRDO has failed to meet the expectations of the armed forces in delivering cutting edge technologies…

The Way Forward

For the acquisition of technology, a two-pronged strategy has to be adopted. The first strategy, which is relatively short term, is to attract FDI in defence production as it will bring not only the contemporary or best technology; but will also bring the capital required as well as enhance the technical skills of the workforce. The government has already increased FDI from 26 to 49 per cent in the defence sector, and in strategic defence technologies there is a mechanism to increase the share of FDI beyond 49 per cent also. The other strategy, which is long term, may focus on invigorating DRDO through structural reforms and creating an R&D division parallel to DRDO in defence public sector units and state owned defence production units. R&D in defence in Joint Ventures under the Public Private Partnership (PPP) model with well defined public funding and Intellectual Property Rights (IPR) sharing mechanism could also be considered so that development of indigenous defence technology could be propelled.

However, in order to boost the ‘Make in India’ programme in defence sector in short term through the FDI route, it needs to be realised that defence industries work in monopolistic or oligopolistic buyer’s market where buyers and sellers are few, mainly the government organisations involved in external and internal security.

Therefore, it needs to be ensured that a sustained market exists for those investors who are investing in defence production so that reasonable returns on investment are assured to investors. Without assured market for a reasonable period of time, no investor will invest money in the defence sector. This requires that foreign investors must be given a purchase order for adequate quantities at least equal to economic order quantity over a reasonably long period so that with optimum investment, the investing firm can meet the commitment of delivering goods and services in a timely phased manner and can earn a reasonable Return On Investment.

With the changing geo-political scenario in the Asia-Pacific, India is being considered as a key player in maintaining regional stability…

Therefore, in order to inculcate confidence among investors for sustained demand of defence products, first reforms have to be made on the demand side in terms of quantity and phased delivery of defence products by freezing the specifications. In the long term perspective plan for acquisition, specifications needs to be frozen for a reasonable period of time keeping in mind the availability of technologies at competitive and affordable costs, strategic requirements based on capabilities of potential adversaries through intelligence gathering and incubation period of next generation weapons system development.

The General Service Quality Requirements (GSQRs) or SQRs should not be based on the whims and fancies of some of the decision makers with vested interest, but should be worthy for operation and use in war as well as pragmatic to manufacture and not change frequently as this may place extra burden on investors in form of acquisition of additional technology, plant and machines to meet the requirements of the changed specifications. Manufacturer’s views should also be invited and examined for consideration while framing the GSQR/SQR. If a contract is won by one company, then that company should supply the item for five to ten years till it recovers its Return On Investment or till the technology is phased out globally or till it becomes irrelevant.

Besides providing a stable, predictable and assured indigenous market, the government should also help the investors in accessing the selective global market through diplomatic means as this requires a lot of considerations in areas of national security, regional stability and human rights. The government needs to put in place a mechanism to promote and support defence export involving main stakeholders such as Ministry of Defence, Ministry of External Affairs, Department of Commerce and Industry and defence industry associations.

Apart from above, the development of the defence industry will also require adequate infrastructure facilities in the form of roads, power, water, ports and communication and ease of doing business through taxes and labour reforms, hassle-free land acquisition, simple environmental and other statutory clearances.

As a long term strategy to boost the defence production capability of a nation, Research and Development capability has to be strengthened…

As a long term strategy to boost the defence production capability of a nation, Research and Development capability has to be strengthened. The DRDO needs to ensure delivery of cutting-edge weapon technologies and systems to the armed forces in time to keep India ahead in the national security arena as a lackadaisical attitude on this account will adversely affect national security.

The DRDO, which is entrusted with the task of design and development, has monopoly in R&D in the defence sector to make India self-reliant in defence systems. However, the DRDO has failed to meet the expectations of the armed forces in delivering cutting edge technologies. Therefore, there is a need to create competition in R&D in defence sector by eliminating the monopoly of DRDO in R&D. All the DPSUs and state-owned units in defence production should be mandated to undertake the R&D activities either independently or in collaboration with DRDO, other laboratories and academic institutions of their choice.

And for this purpose, the government may also consider providing funds for R&D to certain credible private firms that have been supplying critical weapons and equipment to the Indian armed forces for a considerable period of time on a sustained basis on suitable terms and conditions that could take care of proper utilisation of funds for designated projects and address Intellectual Property Rights (IPR) issues.

There are many dual technologies that find application in both civil and defence sectors, and development of these technologies could be funded by the Technology Development Board, Government of India, on priority. The first and foremost requirement will be to increase Gross Expenditure on Research and Development (GERD) to three per cent which is currently around one per cent. Small and Medium Enterprises (SME) provide a large number of employment in the country and employment generation is one of the focus areas in ‘Make in India’. There are many credible Small and Medium Enterprises (SME) that can also undertake design, development and production of small sub-systems of defence equipment, for which they need to be encouraged by providing certain financial and other incentives.

If India wants to become self-reliant in meeting its requirement of defence supplies, it needs to streamline the acquisition policies and processes…

Therefore, if India wants to become self-reliant in meeting its requirement of defence supplies in weapons and equipment and aspires to be a defence exporter in the near future, it needs to streamline the acquisition policies and processes making it stable and easy for existing firms and new investors to meet the supply obligations over a reasonable period of time without incurring extra costs.

Structural reforms in existing state-owned design, development and manufacturing institutions are required to invigorate them in order to tap their full potential. Indigenous private and foreign investors needs to be roped in for defence design, development and manufacturing by assuring the investors a long term supply orders and providing assistance in accessing export market so that a reasonable Return on Investment could be assured to investors.

Collaboration and cooperation between the private sector and DPSUs may create synergy in defence production. R&D needs to be taken to private firms and SMEs need to be encouraged to undertake the development and production of critical sub-assemblies through various policy supports. A boost in defence production in India will improve its defence preparedness, boost economy and provide employment apart from changing the technological landscape of India as it will also boost civil industries.